• Canadian inflation exceeded expectations again…
  • ...and the myths keep piling up

Canadian CPI, m/m / y/y %, September:
Actual: 0.2 / 4.4
Scotia: 0.3 / 4.4
Consensus: 0.1 / 4.3
Prior: 0.2 / 4.1

Canadian core CPI, y/y % change, September:
Average: 2.7 (prior 2.6)
Weighted median: 2.8 (prior 2.7)
Common component: 1.8 (prior 1.8%)
Trimmed mean: 3.4 (prior 3.3%)

Canadian inflation climbed by more than consensus estimated again. The reaction in CAD and short-rates was fairly muted either because it wasn’t a wild break from where markets were leaning and/or because it’s likely best treated as a placeholder with most of the BoC’s projections and decision making process at an advanced stage ahead of next Wednesday’s communications.

Readings like these nevertheless marginally reinforce expectations for a shift to the reinvestment phase of the QE program on October 27th, while still indicating that rate hikes lie some time further away than markets are pricing around March/April and closer toward when the BoC thinks spare capacity shuts. To that effect, we foresee the Bank of Canada transitioning toward four rate hikes over 2022H2 starting in July and then four more in 2023.

It’s still the case that inflation is high for reasons other than year-ago base effects. The seasonally adjusted and annualized pace of inflation was 5.2% in September. Chart 1 shows the trend. We’ve been getting very elevated readings for six months now and starting back in April when lockdowns were in place into late Spring/early Summer. That is one bit of information that indicates that the price pressures we are seeing are not just a reopening spurt.

It’s also the case that this is not really a narrowly-driven phenomenon. Central tendency measures of inflation are meant to weed out some narrow drivers, and they too have escalated and not off particularly soft levels of a year-ago either (chart 2). Further, when it’s your home, your car and fuelling it, your grocery bill and your utilities that are driving the biggest weighted contributions to inflation, then clearly we’re looking at something impacting a rather large chunk of a typical household’s budget (chart 3).

We’ll have more to say on inflation including a sustained overshoot of the 2% target and the BoC outlook in our pending forecast release and accompanying materials. For now, the remaining charts offer a broader perspective on the underlying details.


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